Microeconomics Study Plan CH 13

Réussis tes devoirs et examens dès maintenant avec Quizwiz!

The entry of new firms cause the demand curve of an existing firm in a monopolistically competitive market to shift to the left because​ ______ and become more elastic since​ ______.

each will have a smaller share of the existing​ market; consumers will have additional choices

Which type of efficiency does a monopolistically competitive firm achieve in the long​ run?

neither allocative nor productive efficiency

Is it possible for marginal revenue for a firm operating in a perfectly competitive industry to be​ negative?

no

What effect does the entry of new firms have on the economic profits of existing​ firms? When new firms enter a monopolistically competitive​ market, the economic profits of existing firms

will decrease because their demand curves will shift to the left.

Is zero economic profit inevitable in the long run for a monopolistically competitive​ firm?

​No, a firm could try to continue making a profit in the long run by reducing production costs and improving its products.

At the​ profit-maximizing level of​ output, how much economic profit is this firm​ earning?

​Zero, because at the​ profit-maximizing output​ level, the price equals average total cost.

A monopolistically competitive firm has excess capacity in the sense that if it increased output beyond the quantity associated with profit​ maximization, it could produce at a lower _____________ cost.

Average

Stephen runs a pet salon. He is currently grooming 100 dogs per week. If instead of grooming 100 ​dogs, he grooms 101 ​dogs, he will add ​$69.69 to his costs and ​$66.04 to his revenues. What will be the effect on his profits of grooming 101 dogs instead of 100 ​dogs?

Stephen's profits will change by ​$-3.65

Which of the following statements is​ true?

The firm is not allocatively efficient because the​ profit-maximizing price exceeds marginal cost.

Which of the following statements is​ true?

The firm is not productively efficient because the​ profit-maximizing price is not at the minimum of average total cost

Consider the graph to the right. Is it possible to say whether this firm is a perfectly competitive firm or a monopolistically competitive firm?

Yes. This is a monopolistically competitive firm because its demand curve is downward sloping. The graph shows a short-run equilibrium because the firm is making positive economic profits. What quantity on the graph represents​ long-run equilibrium if the firm were perfectly​ competitive? 6 burritos per week.

Suppose Angelica opens a small store near​ campus, selling beef brisket sandwiches. Use the graph to the​ right, which shows the demand and cost for​ Angelica's beef brisket​ sandwiches, to answer the questions that follow.

a. If Angelica wants to maximize​ profits, she should sell 55 beef brisket sandwiches per day and charge ​$4.50 b. At the above price and quantity she is making an economic profit​ (or loss) of ​$−55. What is Angelica likely to do in the long​ run? Exit the industry

A monopolistically competitive firm is not productively efficient because it produces a level of output where

average total cost is not at a minimum.

What are the key factors that determine the profitability of a firm in a monopolistically competitive​ market? Monopolistically competitive firms will be profitable to the extent that they

differentiate their product and produce at lower average cost than competitors.

Chipotle Mexican Grill restaurants have been a very popular​ "fast-casual" dining optionlong dash—with better food choices than​ fast-food restaurants like​ McDonald's, and faster service and lower prices than traditional restaurants.​ Chipotle's profit per restaurant is much greater than​ McDonald's. Looking forward to ten years from​ now, you would expect​ Chipotle's economic profit per restaurant to be

lower because more firms will imitate Chipotle.

When a firm advertises a​ product, it is trying to shift the demand curve for the product to the​ ________ and make it more​ ________.

right; inelastic

As new firms enter the​ market, a monopolistically competitive firm can maintain profits by

A and C only

With a​ downward-sloping demand​ curve, marginal revenue is below price

because the firm must lower its price to sell additional units.

How might a monopolistically competitive firm continually earn economic profit greater than​ zero? To earn economic profit greater than​ zero, a monopolistically competitive firm must

differentiate its product and produce at lower average cost than competitors.

Which of the following terms is missing in the box on the​ right?

Profitablility

Some companies have done a poor job at protecting the images of their products LOADING... . For​ example, Hormel's Spam brand name is widely ridiculed and is associated with annoying commercial messages received via​ e-mail. You might have heard of other cases where companies have failed to protect their brand names. What can firms do in such​ cases?

All of the above are possible.

7-Eleven, Inc., operates more than​ 20,000 convenience stores worldwide. Edward​ Moneypenny, 7-Eleven's chief financial​ officer, was asked to name the biggest risk the company faced. He​ replied, ​"I would say that the biggest risk that​ 7-Eleven faces, like all​ retailers, is competition. . . .because that is something that​ you've got to be aware of in this​ business." ​Source: Company​ Report, "CEO​ Interview: Edward Moneypennylong dash—​7-Eleven ​Inc.," The Wall Street Transcript Corporation. Which of the following statements is​ true?

All of these statements are true.

Why are many companies so concerned about brand​ management? Companies use brand management

to maintain product differentiation and earn economic profits in the short run.

In the figure to the​ right, consider the marginal revenue of the fifteenthfifteenth unit sold. When the firm cuts the price from $8.00 to $ 7.80$ to sell the fifteenthfifteenth ​unit, the area in the graph denoting the output effect is given by C .

In​ dollars, this effect is ​$7.80. ​ When the firm cuts the price from $8.00 to $ 7.80$7.80 to sell the fifteenth ​unit, the area in the graph denoting the price effect is given by B . In​ dollars, this effect is ​$2.80 ​ The marginal revenue of the fifteenth unit is therefore equal to ​$5

Would a firm selling in a monopolistically competitive market ever produce where marginal revenue is​ negative?

No because marginal cost cannot be negative.

A monopolistically competitive firm​ doesn't produce where P​ = MC like a perfectly competitive firm because

P exceeds MR for a monopolistically competitive​ firm, and​ it's MR that must equal MC for profit maximization

If Daniel sells 250 Big Macs at a price of ​$3.50​, and his average cost of producing 250 Big Macs is ​$3.25 what is his​ profit?

Profit equals= ​$62.5

Competition from Amazon and other online booksellers has resulted in some​ brick-and-mortar bookstores suffering losses. According to an article in the New York Times​, over the past 15​ years, the number of bookstores in the borough of Manhattan in New York City has declined by 30 percent. ​Source: Julie​ Bosman, "Literary​ City, Bookstore​ Desert," New York Times​, March​ 25, 2014. As some bookstores exit the​ market, the demand curve faced by a remaining bookstore will shift to the right . The demand curve may also become less elastic because consumers will have fewer other stores to buy from. After the exit of the competing​ stores, this store is expected to break even .

Right Less Fewer Breakeven

In​ 2010, Domino's launched a new advertising campaign admitting that its pizzas had not tasted very​ good, but claiming that they had developed a new recipe that greatly improved the taste. If​ Domino's succeeded in convincing consumers that its pizza was significantly better than competing​ pizzas, would its demand curve become flatter or​ steeper?When a product becomes moremore differentiated from other​ products, its demand curve becomes steeper . This happens because the slope of the demand curve reflects buyer responsiveness to a price​ change, which is determined in part by the availability of substitutes.​ Thus, when a product becomes moremore differentiated from other​ products, buyers perceive it as having fewer good​ substitutes, and this altered perception induces buyers to be less responsive to price.

Steeper Fewer Less

A student​ remarks: ​"If firms in a monopolistically competitive industry are earning economic​ profits, new firms will enter the industry.​ Eventually, the representative firm will find its demand curve has shifted to the​ left, until it is just tangent to its average cost curve and it is earning zero profit. Because firms are earning zero profit at that​ point, some firms will leave the​ industry, and the representative firm will find its demand curve will shift to the right. In​ long-run equilibrium, price will be above average total cost by just enough so that each firm is just breaking​ even." Is the analysis correct or​ incorrect?

The analysis is incorrect. Firms will not leave the industry when earning zero economic profit. When the​ firm's demand curve is tangent to its average cost curve it is still earning zero economic profit

A firm that is first to the market with a new product frequently discovers that there are design flaws or problems with the product that were not anticipated. For​ example, the ballpoint pens made by the Reynolds International Pen Company often leaked. What effect do these problems have on the innovating​ firm, and how do these unexpected problems open up possibilities for other firms to enter the​ market?

The design flaw will harm the​ firm's reputation, which will be costly to restore. This will create opportunities for competitors to enter the market with a better product. Often the first firm to market is not the most successful over the long term.

An increase in the price of cappuccino will increase the quantity of cappuccinos demanded

True

William Germano previously served as the vice president and publishing director at the Routledge publishing company. He once gave the following description of how a publisher might deal with an unexpected increase in the cost of publishing a​ book: ​"It's often asked why the publisher​ can't simply raise the price​ [if costs​ increase]... It's likely that the editor​ [is already]... charging as much as the market will bear. ... In other​ words, you might be willing to pay​ $50.00 for a ... book on the Brooklyn​ Bridge, but if... production costs​ [increase] by 25​ percent, you might think​ $62.50 is too much to​ pay, though that would be what the publisher needs to charge. And indeed the publisher may determine that​ $50.00 is this​ book's ceilinglong dash—the most you would pay before deciding to rent a movie​ instead." ​Source: William​ Germano, Getting It​ Published: A Guide to Scholars and Anyone Else Serious about Serious Books​, ​Chicago: University of Chicago​ Press, 2001, pp.​ 110-111. According to the graph on the right and what you have learned in this​ chapter, a monopolistically competitive firm responds to an increase in cost by adjusting the price upward . This model does not fit​ Germano's description because he assumes​ what? A. Demand is​ very, though not​ perfectly, elastic. B. Demand is​ unit-elastic. C. Demand is perfectly elastic. Your answer is correct.D. Demand is perfectly inelastic. If a publisher does not raise the price of a book following an increase in its production​ cost, the result will be A. economic losses. B. a negative economic profit. C. less than maximum profit. Your answer is correct.D. All of the above. The ability of a publishing company to raise book prices when costs increase would be​ greater, the lower is the elasticity of demand for published books.

Upward Demand is perfectly elastic Less than maximum profit Lower

What is the difference between zero accounting profit and zero economic​ profit?

Zero economic profit includes a​ firm's opportunity costsopportunity costs but zero accounting profit does not.

Michael Korda for many years was​ editor-in-chief at the Simon​ & Schuster book publishing company. He has described the many books that have become bestsellers by promising to give readers financial advice that will make them​ wealthy, by, for​ example, buying and selling real estate. Korda is very skeptical about how useful the advice in these books​ is: ​ "I have yet to meet anybody who got rich by buying a​ book, though quite a few people got rich by writing​ one." ​Source: Michael​ Korda, Making the​ List: A Cultural History of the American​ Bestseller, 1900-1999, New​ York: Barnes​ & Noble​ Books, 2001, p. 168.

a. On the basis of the analysis in this​ chapter, which of the following statements is​ true? All of the above b. Refer to the figure to the right. Note that P and Q are the​ profit-maximizing price and quantity. This firm was first in the market. It is currently earning​ what? An economic profit c. Refer to the figure to the right. What will happen if there is entry into the​ market? Demand curve will shift to the left

With a​ downward-sloping demand​ curve, average revenue is equal to price

actually, average revenue is always equal to​ price, whether demand is downward sloping or not.

Define marketing. Is marketing just another name for​ advertising? Marketing is

all the activities necessary for a firm to sell a product including​ advertising, product​ design, and product distribution.

What term describes the actions of a firm intended to maintain the differentiation of a product over​ time?

brand management

Ben and Jerry are managers at the​ company, and they have this​ discussion: Ben​: We should produce​ 4,000 lamps per month because that will minimize our average costs. Jerry​: But​ shouldn't we maximize profits rather than minimize​ costs? To maximize​ profits, don't we need to take demand into​ account? Ben​: ​Don't worry. By minimizing average​ costs, we will be maximizing profits. Demand will determine how high the price we can charge will​ be, but it​ won't affect our​ profit-maximizing quantity. Evaluate the discussion between the two managers ​Ben's assertion that the firm should produce the quantity of lamps where average costs are minimized is

incorrect because profits are instead maximized at the quantity where marginal cost equals marginal​ revenue, which may be different since marginal revenue depends on consumer demand

Does the fact that monopolistically competitive markets are not allocatively or productively efficient mean that there is a significant loss in economic​ well-being to society in these​ markets? Though monopolistically competitive markets are not allocatively or productively​ efficient, consumers benefit in that

they are able to purchase a differentiated product that more closely suits their tastes


Ensembles d'études connexes

Chapter 7: Premature and Small-for-Date Infants

View Set

PHRE Midterm (includes quizzes 1-3)

View Set

1: Sport and Exercise Psychology

View Set

Oracle CPQ 2021 Implementation Essentials Exam PART 2

View Set

EA Unit 2 Determining filing status and residency

View Set